Understanding Financial Vulnerability in Partially Dollarized Economies
The reduction of macroeconomic vulnerability in emerging markets is now at the core of the research agenda. Liability dollarization plays a vital role in the understanding of vulnerability and its implications (from a general equilibrium perspective) have been addressed in the literature via the inclusion of a â€œfinancial acceleratorâ€ mechanism. In particular, its formalization is based on Bernankeâ€™s, et al. (1998) optimal contract, which predicts a negative relation between an external finance premium and firmâ€™s net worth. We can identify two channels by which the financial accelerator can be triggered. The first, emphasized in Bernanke, et al. (1998) and Gertler, et al. (2001), operates via shocks on asset prices which, in turn, affect the realized return on capital and net worth. The second channel, privileged in CÃ©spedes, et al. (2000a y 2000b), depends on unanticipated movements in firmâ€™s debt burden which directly affect their net worth. Not surprisingly, liability dollarization plays an important role in the activation of this second channel since the unexpected component of a real depreciation can greatly magnify the debt burden of firms if their debt is denominated in dollars. Based on this, CÃ©spedes, et al. (2000a y 2000b) present a first approximation to a definition of vulnerability. In particular, an economy is classified as vulnerable if a real exchange rate depreciation implies an increase in the risk premium faced by firms. This result is neatly summarized in the log linear version of the risk premium equation and depends, crucially, on firms indebtness level. Their model, however, assumes complete depreciation and, thus, lacks the asset price channel explained above. Gertler, et al. (2001) recognize this issue and present some simulations using dollar denominated debt and an active asset price mechanism. Despite these significant contributions to the understanding of the consequences of liability dollarization for output fluctuations, we believe some important extensions are now in order: (i) if we want to address the implications of the degree of dollarization, we need a general equilibrium model that admits firmâ€™s debt to be denominated in both local and foreign currency (the two models just described assume full liability dollarization); (ii) central bankâ€™s response to exchange rate innovations (given a degree of dollarization) must be assessed from a welfare point of view; and (iii) given a dollarization level and central bankâ€™s response to shocks, a new, encompassing, definition of vulnerability must be provided in order to adequately address the way in which it can be mitigated
|Date of creation:||11 Aug 2004|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999.
"The financial accelerator in a quantitative business cycle framework,"
Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393
- Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
- Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
- Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September.
- Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, vol. 94(4), pages 1183-1193, September.
- Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
- Broda, Christian & Yeyati, Eduardo Levy, 2006. "Endogenous Deposit Dollarization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 963-988, June.
- Christian Broda & Eduardo Levy Yeyati, 2003. "Endogenous deposit dollarization," Staff Reports 160, Federal Reserve Bank of New York.
- Christian Broda & Eduardo Levy Yeyati, 2003. "Endogenous Deposit Dollarization," Business School Working Papers dieciseis, Universidad Torcuato Di Tella.
- Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
- Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
- Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
- Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2007. "External Constraints on Monetary Policy and the Financial Accelerator," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 295-330, 03.
- Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2001. "External constraints on monetary policy and the financial accelerator," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
- Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2003. "External constraints on monetary policy and the financial accelerator," BIS Working Papers 139, Bank for International Settlements.
- Mark Gertler & Simon Gilchrist & Fabio Natalucci, 2003. "External Constraints on Monetary Policy and the Financial Accelerator," NBER Working Papers 10128, National Bureau of Economic Research, Inc.
- Elekdag, Selim & Tchakarov, Ivan, 2007. "Balance sheets, exchange rate policy, and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 31(12), pages 3986-4015, December.
- Selim Elekdag & Ivan Tchakarov, 2004. "Balance Sheets, Exchange Rate Policy, and Welfare," IMF Working Papers 04/63, International Monetary Fund.
- Diego Winkelried & Marco Vega, 2004. "How Does Global Disinflation Drag Inflation in Small Open Economies?," Econometric Society 2004 Latin American Meetings 76, Econometric Society.
- Marco Vega & Diego Winkelried, 2004. "How Does Global Disinflation Drag Inflation in Small Open Economies?," Macroeconomics 0403008, EconWPA.
- Marco Vega & Diego Winkelreid, 2005. "How Does a Global Disinflation Drag Inflation in Small Open Economies?," Working Papers 2005-001, Banco Central de Reserva del Perú.
- Moron, Eduardo & Winkelried, Diego, 2005. "Monetary policy rules for financially vulnerable economies," Journal of Development Economics, Elsevier, vol. 76(1), pages 23-51, February.
- Eduardo Moron & Diego Winkelried, 2002. "Monetary Policy Rules for Financially Vulnerable EconomieEd," Macroeconomics 0205001, EconWPA.
- Eduardo Morón & Diego Winkelried, 2003. "Monetary Policy Rules for Financially Vulnerable Economies," IMF Working Papers 03/39, International Monetary Fund.
- Eduardo Levy Yeyati & Alain Ize, 1998. "Dollarization of Financial Intermediation; Causes and Policy Implications," IMF Working Papers 98/28, International Monetary Fund.
- Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
- Svensson, L.E.O., 1998. "Open-Economy Inflation Targeting," Papers 638, Stockholm - International Economic Studies.
- Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
- Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
- Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers.
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
- Eduardo Moron & Juan F. Castro, 2003. "Dedollarizing the Peruvian Economy," Macroeconomics 0312005, EconWPA. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:ecm:latm04:260. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.